The Origin of Money — Part I, Credit Money
A comprehensive breakdown of an extremely divisive economic debate. Part 1/4.
Although it’s hard to imagine, societies didn’t always have money. There was a time — and have been many times — when there was not a general medium of exchange. It’s time to learn about the origin of money.
In this set of articles, we’re going to cover the two prevailing theories of the emergence of money (by which I mean the common medium of exchange in an economy). One, that it emerged out of the barter system — and two that it emerged out of credit-based economic systems. I will also cover the Chartalist theory of money.
There is a lot to learn from each perspective, and I have tried to make the strongest and most generous case for each theory that I was able to with my current understanding. I welcome any suggestions or corrections. I will also present the two dominant and (seemingly) conflicting theories within a common interpretive structure, so that regardless of which historical account you subscribe to — and regardless of which one, if any, is actually true — you still have a means of making sense of money.
I will be subdividing this topic into four smaller, conceptually distinct articles so that it is easier to digest. By the end of them, you will have the necessary grounding to be able to converse with economists about the origin of money, and engage deeply and critically with writings on the subject. If you haven’t yet read my first (short) article ‘What the F*** is Money?’, I highly recommend starting there as it provides some useful background. For a further elaboration on how a definition of money has been arrived at, see ‘The Philosophy and Methodology of Economic Definitions’.
Let’s get started. It’s time to dive into the credit theory of money.
Money from a credit-based monetary system
Debt and gift-debt societies
As long as humans have been smart enough to talk to each other, there has probably existed some form of debt. It’s a really old idea. Debt definitely existed before money as we have defined it (a common medium of exchange). In simple terms, having a debt (being indebted) is just owing somebody something. It could be money, it could be a pie, or it could be something undefined but which needs to fulfil a mutual sense of repayment. Being indebted to someone must always be the result of them having rendered some benefit unto you. Why? Because if you owe somebody something and they haven’t done anything for you; haven’t given you any benefit whatsoever — and you still owe them — then that would be slavery, not debt, and well outside the realm of economics. Since being indebted to someone is always the result of them having given some benefit to you, debt is necessarily always the latter half of an exchange.
Debt is intimately connected to something called ‘credit’. If a debtor is somebody who owes something, a creditor is somebody who is owed something. A non-credit exchange is when you give somebody something they want, and they give you something you want at the same time. A credit exchange is when somebody (a creditor) gives you something that you want, and you give them something they want too in return, but at a later time in the future. You become indebted to them, and the exchange is only completed when you give them what you owe them (pay off your debts). Again, all debt is just the second half of an exchange waiting to be completed. This is not an anthropological claim that all human interaction is fundamentally exchange — as some argue. Rather, this is simply the definition of what debt is.
In modern societies, credit exchanges usually occur when someone wants something from somebody else, but can’t or doesn’t want to pay them back immediately. Like a credit card, a bar tab, or a loan. However, there are many instances of ancient societies which ran purely on what we can call a ‘gift-debt system’, which had sociocultural rather than economic underpinnings.
In gift-debt societies, you would give a gift to somebody and sociocultural norms would implicitly make them indebted to you, ensuring that they gave you something back in the future. For example, in some you would give gifts back and forth with a person or group over time as a way of maintaining a relationship or peace with them.
For example, I have a friend who buys me food sometimes, and I buy him food other times — and we don’t keep track of the exact amounts we’ve bought each other — we just try to make it roughly equal and balance over time, on good faith. And we’ve been doing this for years.
If my friend stopped buying me food but still kept expecting me to buy them food, once I realised they weren’t going to buy me any food back, I would stop — and the unspoken system of exchange would end. I would also probably tell others not to buy things for them. This is an example of gift-debt exchange and a gift-debt relationship. Gift-debt societies were, in one sense, giant complexes of these informal debt relations.
In gift-debt societies, often if somebody failed to eventually give a return gift to somebody else (like a monkey who gets checked for fleas by others but never checks their fellow monkeys for flees in return), they would be punished with reduced status by the community, or their relationship with the gift-giver would end (kind of like how there are negative social consequences of forgetting to give someone a birthday present!). This socially enforced punishment system ensured that people generally repaid their debts. Interestingly, the word credit literally means trust — and the ability to extend credit (creditworthiness; credibility) has been deeply connected to social status in most societies throughout history.
Gift-debt relationships as credit exchange
Receiving a ‘gift’ and being subsequently indebted to someone by social norms alone like in gift-debt societies is without a doubt exchange, just a credit-based one completed over a period of time, in a delayed manner, rather than instantaneously in direct trade. One party gives something to another party — in return for something else. Sometimes, what you got out of the exchange was not a good or a commodity directly, but a stronger relationship or higher status — let’s call it: creditworthiness, that would entitle you to goods in the future. The whole process was deeply intertwined with the interpersonal, political and religious aspects of these societies. But it is very clear that the gift-debt system was still exchange — specifically credit exchange. Remember, all debt MUST be the second half of an exchange — or it would be slavery, not debt. Not to mention, most (if not all) gifts in these societies were given with the implicit expectation of receiving some benefit, from someone, at some future time. Whether directly, as a physical thing, or indirectly — as a moral obligation that could be leveraged for whatever ends. A handful of historians emphasise the differences between gift exchange and commodity exchange — but even they do not debate that what was occurring in gift-debt societies was without a doubt, exchange.
Now, when I give my friend food, it is not really because I want him to buy me food another day. It is not a trading relationship. It is because I want to show him that I care about him, appreciate him — and that I would sacrifice for him. And when I want him to do the same back, it is because I want him to feel the same way as my friend. So the gift-debt relationship we have is an expressive outlet for the strength of our underlying relationship, which many argue is fundamentally not just a reciprocal (self-interest driven) relationship. From this perspective, a gift-debt credit relationship between two people is not just an exchange, but rather, a means by which a deeper human relationship expresses itself. Which is why credit relationships do not suddenly end when nothing is owed between either parties. If me and my friend are ‘even’, and neither of us owes the other food — we will restart or continue the gift-debt relation with one of us buying something for the other person.
On this basis (that “human relationships cannot be reduced to exchange”) some try to dismiss that gift-debt exchange is actually exchange. While, as just demonstrated, the category of ‘exchange’ may not adequately encapsulate the full extent of human relations (we’ll leave it to philosophers and anthropologists to debate), this doesn’t mean that gift-debt relations wouldn’t be instances of exchange. They certainly still would be. If two people had a relationship which was fundamentally not an exchange (supposing it was possible), this doesn’t mean that they suddenly couldn’t engage in forms of exchange with one another. And even if the exchange they engaged in was for the purpose of strengthening and emphasising their relationship, it wouldn’t suddenly make what they were doing not exchange. Having now confirmed that the gift-debt system was indeed a system of exchange (I know it wasn’t really controversial to begin with, but you’d be surprised), let us proceed.
The credit theory of money
Supporters of the credit theory of money hypothesise that money first evolved out of ancient credit structures like gift-debt systems — out of people owing other people things. This very well may be the case. But… how? It’s actually really simple. It all starts with something like tally sticks. A tally stick is a stick (a literal stick) that information is recorded on. Throughout history, tally sticks in various forms (and sometimes other miscellaneous tools) were used to record debts. For example, somebody might have a tally stick which has etched into it that Plato owes them 5 eggs. If it was a split tally stick, then Plato would have the other half of the stick, which would say the same thing — and the two halves would fit perfectly together like puzzle pieces to confirm that neither was a forgery. It was relatively easy to tell if somebody tampered with the initial tally. Tally sticks were records of debts, units of account, and credit-money theorists propose that money arose as a means of tokenising debt — meaning, as a way of giving debts a tradeable form.
The argument goes something like this: if Plato consistently pays back his debts, and everybody knows that he does — then a tally stick which says that the holder of the stick is owed five eggs by Plato is as good as five eggs. The stick itself is effectively worth five eggs, because whoever holds it will be able to get five eggs from Plato. So, the theory goes, people started to trade using these tally sticks, these units of account, directly. If they wanted something from someone, they could just give them a tally stick worth whatever the person wanted in return. The tally stick itself transformed into a medium of exchange. And not just into ‘A’ medium of exchange used sometimes — but into ‘THE’ generally accepted medium of exchange that was used in most transactions in the society — into money.
Interpretation of the credit theory
The (small) problem I have with this theory of the origin of money is not that it is historically inaccurate (that is for historians to decide) — but that it is often semantically inconsistent with money as we know it. Many proponents of the theory tend to use it to redefine what money is, by defining money first as a unit of account for debts (such as tally sticks), which then acquired the property of being a common medium of exchange. But this is simply a redefinition of money from how it is typically understood. We could choose to define money that way — but it would be a different thing entirely to ‘money’ as everybody knows it. It would be the history of the (common?) unit of account, rather than the history of the common medium of exchange.
For reasons already covered, we will instead define money as what most use the term to mean — and what we find it to be referred to as from prison yards to playgrounds: as the common medium of exchange in an economy. This definition already gives us plenty of topics to explore in this series. It is also still perfectly consistent with the credit-based history of the origin of money. Under the “common medium of exchange” definition of money, we would simply say that in ancient credit systems money was not the tally of the thing owed, nor the wide variety of things owed that were used as media to complete exchanges — but whatever the common medium (or media) of exchange in the economy was. If most gift-debt exchanges took place with a common medium (for example, cowrie shells), then that common medium was money. And if tally sticks (the unit of account in the economy) themselves became generally accepted media of exchange, then that was the precise point at which they became money.
The reason this is important, is because some people think that the exact circumstances which ‘money’ emerged out of make a difference to how we should define money. In reality, this does not make sense — because without having a clear definition of what money is to begin with, we could not determine the historical circumstances which ‘money’ emerged out of in the first place. The need for a definition of money precedes the ability to search for it in history. The only way we gained any insights about the ‘history of money’ in the first place was to have already had a definition of money — and that was ‘the common or generally accepted medium of exchange in an economy’.
Attempting to change the definition of money based on history does not achieve anything other than redefining and reconceptualising what money is. And in economics, we do not define things based on their chronology, but through the desire to intelligently describe a certain set of economic phenomena. So even if the common medium of exchange evolved out of the common unit of account, this does not mean that the definition of money should be shifted to “a common unit of account tokenised with a common medium of exchange.” Because such a definition would limit our ability to describe the many economic situations where the subject of focus is “the common medium of exchange in an economy.”
An example of the redefinition of money which takes place in credit theories of money can be found in David Graber’s book ‘Debt: The First 5000 Years.’ In this excerpt, you can see how the definition of money shifts from ‘token of exchange’ to ‘unit of account’ based on historical reasons.
“Credit Theorists insisted that money is not a commodity but an accounting tool. In other words, it is not a “thing” at all. […] Units of currency are merely abstract units of measurement, and as the credit theorists correctly noted, historically, such abstract systems of accounting emerged long before any particular token of exchange”
But neither redefining money or “insisting” that money is one thing over any other increases our knowledge in any capacity. It merely changes the explanatory framework we interpret economic phenomena within. And there is nothing wrong with that at all! If we were to redefine ‘money’ to mean what ‘credit money’ means, then we would just use slightly different words to explain the credit theory of money — but the actual theory of history in question wouldn’t change. Just the way we described it in words. This certainly deserves to be pointed out, because too many people think that somebody defining something like money differently to them means that they disagree with that person about economic facts, or that their insights built on an alternative semantic base can be safely dismissed as ‘incorrect’. But this is just a fallacy.
Congratulations! Now you have learned about the credit theory of money, which says that money emerged as a means of tokenising debt. That money is literally tokenised debt — credit money. In short: society ran on credit exchanges, and physical IOU’s eventually became adopted as the common medium of exchange (money).
I hope you enjoyed the read — if you learned something, then give me a follow and stay tuned for more! In the next article, we’ll discuss the Chartalist theory of money. After that, we’ll go through the barter theory and the evolution of money — and then finally, we’ll wrap up by breaking apart some of the false binaries polarising economic discourse around money’s origin.
